Mobile continues to drive Facebook's growth

DeepaSeetharaman

Facebook Inc.'s mobile bet has shrunk the time it takes the social network to leap from one milestone to the next: On Wednesday, Facebook topped $2 billion in quarterly profit, six months after crossing the billion dollar mark for the first time.

The number of new users -- and the ad dollars that follow them -- surged in the second quarter.

Facebook added 220 million monthly active users in the past year, bringing the total audience to 1.71 billion users. More than 90% of Facebook's users are on mobile devices, where Facebook rakes in the bulk of its ad dollars.

Advertising on mobile devices accounted for 84% of Facebook's $6.2 billion in advertising sales in the latest quarter.

"Mobile continues to be the strength," Facebook Chief Financial Officer Dave Wehner said in an interview.

The banner results drove Facebook's shares to a new high, crowning it the fourth most valuable listed company in the U.S. In after-hours trading, the stock price jumped 7% to $131.51, giving it a market capitalization of $370 billion.

Executives said they expect growth to slow over the rest of the year, as the company laps the second half of 2015, when revenue growth began to accelerate. But it has its next growth move planned: video.

For now, mobile is enabling an acceleration of growth. Facebook and Google -- now known as Alphabet Inc. -- each hit $2 billion in quarterly profit 12 years after their founding. But it took Google 3 1/2 years to go from $1 billion to $2 billion -- something Facebook accomplished in a half a year.

The social network said net income in the second quarter totaled $2.06 billion, or 71 cents a share, nearly tripling the $719 million in profit a year ago.

Facebook is outpacing its competitors in advertising and user growth.

On Tuesday, Twitter Inc. said it has added nine million users in the past year, as it reported its smallest quarterly gain in revenue. Yahoo Inc. generated $504 million in sales last quarter from its mobile, video, native and social ads.

Facebook's market share in mobile advertising, where it is the second-biggest player after Google, is expected to jump to 12% this year from 8.6% two years ago, according to research firm eMarketer. Twitter and Yahoo both trail, with less than a 2% market share this year.

"There's a common misconception that the law of large numbers will prevent Facebook from growing further," said Rahul Shah, chief executive of Ideal Asset Management, who says Facebook accounts for about 40% of his allocation. "But I think what they're missing is that they're stealing ad dollars from every other source there is. Pricing will continue to rise and they'll continue to beat estimates."

Facebook generated $3.82 in revenue per user in the second quarter, up from $2.76 a year ago. Its average price per ad rose 9% as users spent more time on their mobile app, where Facebook only shows higher-priced news feed ads, Mr. Wehner said.

On desktop, Facebook shows a mix of news feed ads as well as lower-priced ads on the right-hand side of the news feed.

Facebook's success in mobile is the result of efforts started back in 2012, when the company was struggling with users' transition to smartphones.

At the time, CEO Mark Zuckerberg told his team to prioritize mobile-first products, and said he kicked out anybody who proposed features tailored for desktop.

Wednesday, Mr. Zuckerberg said Facebook would apply that same focus to becoming "video-first." The company is pouring big money into this effort and Mr. Zuckerberg predicted that within five years or so most of what people consume online will be video.

Facebook will have to make it easier to watch videos as well as offer tools to create them. Mr. Zuckerberg said the company is looking to build video products for its messaging apps such as Facebook Messenger and WhatsApp, both of which have than a billion users apiece.

Over the past six months, the company has been promoting its live-video product, Facebook Live. Last month, The Wall Street Journal reported that Facebook was paying more than $50 million to nearly 140 media companies and public figures to broadcast live.

This effort could help Facebook persuade advertisers to divert their television ad budgets to buy video ads on the social network. Video is "one of the big things that if we get right I think it's going to unlock a lot of sharing and opportunity," Mr. Zuckerberg said.

Facebook is testing models so creators can make money from videos posted on Facebook, but nothing has been widely rolled out.

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